Tactical Gold Trends 2

Last week we took a look at the current tactical, or short-term, trends affecting silver.
The white metal is certainly languishing near its major support lines these
days, but thankfully both its bull market and its current tactical uptrend
remain very much intact.

This week I would like to return our analytical focus to gold. While our subscription
newsletters continue to monitor and evaluate the tactical gold trends as they
unfold, it has been a couple months now since the original Tactical
Gold Trends essay was published. With the exciting autumn trading season
dawning, an update is in order.

Gold really is the ultimate precious metal and its behavior is certainly the
single most important driver of investment performance in everything precious-metals
related. As long as gold's secular
bull market remains intact and healthy, investors and speculators can overlook
technical weakness in other arenas like silver or precious-metals equities.
Gold truly is the PM key.

As in my original tactical gold trends essay, there are three charts that
we need to consider when discussing gold trends. First, obviously, the gold
chart itself is absolutely crucial. No surprise here! Second, since gold still
trades like it's in a Stage
One currency bull, it is important to consider the behavior of gold's arch
nemesis in the fiat-paper world, the mighty US dollar. Finally, since leveraged
gold stocks continue to be the most popular gold investments and speculations,
we will examine the HUI gold-stock index trends.

Charts are so important to prudent investing and speculation because they
place recent price movements within their proper context. Whether gold rises
or falls tomorrow, this move in isolation is probably meaningless. But when
series of price moves are considered in trends, clear patterns emerge that
help us view the markets objectively and short-circuit our emotions that are
so hyper-sensitive to the immediate. Perspective is everything.

And the technical perspective on gold remains outstanding. There is no more
important tactical chart for PM investors and speculators to monitor than that
of the current gold scene.

Even after gold's necessary, healthy, and expected bull-market
correction earlier this year, gold's key 200-day moving average continues to
march northwards. Rising 200dmas are one of the most foundational bull-market
technical signatures for two reasons. First, 200dmas tend to run parallel with
the primary strategic trend, which in gold's case is indisputably higher.

Second, 200dmas usually form the strongest bull-market support zones from
which corrections tend to end and bounce higher. The early 2004 gold correction
ended up slicing through its 200dma support initially, but gold has since made
a strong comeback. The metal is now clawing relentlessly higher and soon its
200dma will be under it and acting as major support once again.

And, while not evident in this tactical chart, back in May gold really didn't
break materially below its 200dma when considered in the context of
its entire secular bull. It merely traded down to its bull-to-date linear
support line before bouncing higher and recovering in early May. Last year
gold also traded slightly below its 200dma in its early 2003
correction before a powerful upleg, so temporary sub-200dma readings are
nothing to fear.

The red line tied to the left axis of this graph, Relative Gold (rGold), normalizes
this important relationship between gold and its 200dma so it is easier to
compare over time. Calculated by dividing gold by its 200dma, it shows gold
as a constant multiple of its major 200dma support. When gold bottomed in May,
rGold traded down to 0.953, or 95.3% of gold's 200dma. The preceding April
2003 major interim bottom was similar when rGold bounced at 0.978, again slightly
under gold's 200dma.

As the red support line drawn above shows, rGold is now climbing in a definite
uptrend. It is spending more and more time above the crucial 1.00 level, where
the gold price equals its 200dma. Whenever an asset's price is consistently
gaining ground relative to its 200dma it is a very bullish sign and provides
strong evidence that its bull market remains strong.

From a tactical perspective, gold's new uptrend, which I believe will ultimately
blossom into a full-blown upleg, looks absolutely fantastic since its correction
ended in May. The rising blue support and resistance lines on the right side
of this graph frame this current tactical gold trend perfectly. There are all
kinds of interesting developments in the gold price in the past four months
that ought to excite gold investors and speculators. Things are looking good!

We will start our tactical gold analysis from the bottom, its current support
line. Note above that gold has made three consecutive higher interim lows since
May. These bounces in June, July, and earlier this month are numbered above.
Collectively a best-fit line drawn through these three higher lows and the
May correction forms a rock-solid tactical support zone. This current support
is slightly shallower than gold
initially indicated in June and July, but it is nevertheless quite bullish.

It is also exciting to note that this support line is due to intersect gold's
200dma in the coming weeks. Thus, if gold remains in its current uptrend, it
should be trading back above its 200dma for good, at least until the next major
correction after dazzling new bull-to-date highs are achieved. Gold's investment
appeal will definitely rise for technically-oriented players worldwide once
it leaves its 200dma in the dust to clearly signal its re-emergence in strong
bull-market mode. I can't wait.

And it is not only the bottom half of gold's new tactical uptrend channel
that is technically gorgeous. Its top resistance line is also very well defined
and continuously ramping higher than gold's 200dma. There have already been
three consecutive higher interim highs since May, numbered above, in June,
July, and August. A best-fit line drawn through these highs runs parallel with
the lower support line and forms a textbook-perfect uptrend channel.

Technical analysis is simple, but elegant. It allows the prices, considered
in context, to do the talking rather than our own volatile emotions. The message
of this tactical gold chart is very positive and bodes well for gold in the
months ahead as this upleg starts to accelerate.

Since its correction ended in May, gold has carved a flawless series of higher
interim lows and higher interim highs. These new higher lows and highs form
a crystal-clear uptrend channel, which is rock solid with several intercepts
each on gold's lower support and upper resistance. We couldn't ask for a more
persuasive and bullish tactical technical chart.

This is great news friends! If you are like me, perhaps this past summer just
felt slow and lethargic to you in gold terms. It certainly did for me
at times. Gold hasn't yet rechallenged its January and April bull-to-date highs,
it hasn't seemed to have a lot of staying power above $400, and we certainly
haven't seen any real fireworks since 2003.

But as this chart reveals, all is well in spite of the perceptions of slow
times for gold. Our capricious emotions, driven almost solely by random day-to-day
market noise, led many PM players to conclude that gold was struggling over
the summer. But this dazzling technical picture shows anything but struggle.
Rather we have a very methodical, determined, and potentially powerful new
gold upleg systematically materializing.

Of course gold uplegs don't develop in a currency vacuum, at least not in Stage
One. Until gold breaks into Stage Two, its near-term fortunes are heavily
dependent on dollar weakness. This current US Dollar Index tactical chart
provides a fascinating study in contrasts. While gold's chart is technically
as unambiguous as a chart can be, the dollar's latest trend has grown muddled
and unclear. As technical confusion often portends, the dollar may be on
the verge of a serious move.

Not coincidentally, the US Dollar Index reached its latest interim highs in
early May on the very day that gold was hitting its own interim lows.
Gold and the dollar are ultimately competing currencies, six-millennia-old
real money with timeless intrinsic value versus three-decade-old 100%
fiat money ultimately worth nothing more than the paper on which it is printed.
There is no doubt that gold will win this titanic battle in the end,
as no fully-paper currency backed by nothing but faith has ever lasted long
in the grand scheme of things.

Nevertheless, over the short-term there are some epic battles waged between
sound money and Washington's hollow IOUs. Right now one of them seems to be
raging just below the surface, not readily apparent to the world as a whole
yet but quite evident to those willing to pay attention. I think this struggle
is contributing to the dollar's extreme technical indecisiveness of the past
couple months.

Following its May interim top after a normal and expected bear-market
rally, the dollar's downtrend resumed in what will probably ultimately
prove to be the fifth major downleg of its secular
bear market. In June and the first half of July the dollar fell right
on schedule, probing new lower interim lows marked by the blue numbers above.
These established a solid downtrend support line.

In late July the dollar surged, rocketing from the bottom to the top of its
downtrend channel. As I discussed last
week in regards to silver though, full swings through tactical trend channels
are not at all uncommon and nothing to get excited about. While the dollar
tried to surge above its 200dma primary bear-market resistance, it couldn't
hold these lofty levels for long and soon failed lower. This failure helped
define the parallel top resistance line that enclosed the dollar's new tactical
downtrend. So far so good.

Then the dollar bounced again in mid-August, but this time starting well above
its tactical support at the light-blue point 1 drawn above. This bounce was
nothing exciting technically either, as prices tend to oscillate more or less
randomly all over the place within their tactical trend channels. The dollar
frenetically surged higher again and broke tentatively above its resistance
line in late August, although the breakout was not decisive or material. Since
then the dollar has continued its technical flirting with breaking out of its
downtrend, albeit without much success.

Now typically there would be no reason even to discuss this non-breakout,
but Wall Street technical analysts have been making a big deal out of the dollar's "new
uptrend" and frightening some PM players. This supposed uptrend is marked in
light blue above, a new multi-month support line with two higher lows. Obviously
this new-dollar-uptrend thesis is of great interest to the gold community since
gold is so dependent on dollar weakness during the early years of its bull
market. If the dollar rallies strongly, gold will probably take a serious hit.

While we could indeed be witnessing the advent of a new dollar uptrend, as
the markets are just a study in probabilities and anything can happen,
for a variety of reasons I remain skeptical and continue to read this dollar
technical ambiguity as bearish. I'll start with the least important and conclude
with the most important dollar bearish arguments.

Check out the latest dollar highs above, which are numbered. The US Dollar
Index hit 92.01 in May before rolling over and heading south. In June it rallied
up to its 200dma and closed briefly at 90.01. In July it rallied again, streaked
up through its entire downtrend channel, but only managed to close at 89.95.
Then, in August, its attempt to break out of its downtrend ended unceremoniously
at a closing level of 89.84. So what does the series 92.01, 90.01, 89.95, and
89.84 reveal? Lower highs!

While this is subtle, any series of lower highs is certainly not a
bullish omen. This bearishness is reinforced by the dollar's major moving averages.
The dollar's shorter 50dma has been decaying lower all summer, betraying a
tactical downtrend once the random market noise is distilled away by the moving
average. Even more importantly, the dollar's key 200dma, its primary bear-market
resistance, remains in its long descent. This has bear market written all over
it.

If the dollar was to rally significantly higher from here, near both its tactical
and long-term resistance, then it would put the dollar's secular bear in jeopardy.
Yet, relative to historical precedent, our current dollar bear remains relatively
young and unlikely to end so soon. Since the early 1970s when our current totally-unbacked
fiat dollar was born, major secular dollar trends have tended to run for 5
to 7 years or so before giving up their ghosts. Our current dollar bear, however,
is barely 3 years old now so it is highly unlikely that it has already fully
run its course.

And dollar fundamentals are certainly not improving, with the States running
record deficits, staggering levels of debt completely unprecedented in world
history, and trivially low interest rates designed to ruthlessly punish international
dollar investors. The dollar bear lives!

I believe that these three factors, the dollar's lower highs, its descending
200dma, and its relative youngness as far as dollar bears typically go far
more than outweigh any dollar bullish arguments based on the short light-blue
trend line above. The dollar has been challenging its upper resistance
zone, but so far it has failed to break out decisively after multiple attempts.
And if the dollar can't break out in the light summer season when trading in
the northern hemisphere evaporates, then I doubt it can do it in the winter
either when global currency traders are paying attention and ready to short
the primary dollar bear.

Instead, the dollar's recent apparent strength in terms of support has crunched
it into one tight wedge. The light-blue support line and the blue downtrend
resistance line are compressing the dollar price. This zone of compression,
or indecision, will probably break out sharply one way or the other in the
next month or two. My guess is the highest probability outcome is a break lower,
potentially down to the dollar's lower support now running around 85ish. Naturally
such an event would unleash gold to soar.

In this scenario where gold catapults higher as the dollar cascades through
its downtrend channel, unsurprisingly the primary beneficiaries would be the
elite unhedged gold stocks. Our final chart of interest this week examines
the HUI unhedged gold-stock index. Like gold, gold stocks have remained bullish
even through what felt like a slow summer psychologically.

This HUI chart is pretty interesting, especially since the expected and
healthy correction ended in early May. The HUI's current tactical uptrend is
not as precise as gold's nor as messy as the dollar's, but kind of in between.
Nevertheless, we are witnessing a series of higher lows and higher highs
in the HUI just as we ought to when gold is strengthening.

At the moment the HUI is in a fascinating place technically, tightly meandering
at the convergence of several major zones. First, the HUI is challenging its
latest tactical resistance line, the ascending blue line on the right. Second,
it is also challenging its old downtrend resistance line that arose from its
correction in early 2004. Finally and most importantly, it is also challenging
its key 200dma, which has been its major support for most of its bull to date.

Once this consolidation period is over and the HUI breaks out of this triple-technical
zone in which it is mired at the moment, I suspect it will head higher. And
it won't have to rally much to claw back above its 200dma once again. Once
the HUI trades decisively back above its major 200dma support, it will put
a lot of nervous PM investors at ease and the capital chasing gold stocks ought
to grow significantly and bid up their prices.

While this HUI chart is generally bullish and there is an uptrend,
there are a couple bearish developments of note. It is interesting that the
dollar strength and gold weakness in July was scary enough to PM-stock investors
and speculators to cause them to sell the HUI down below its earlier interim
low in June. July's lower low is certainly not a bullish sign when considered
in isolation, but the HUI has recovered nicely from it and has already surged
back up to the top of its trend channel. Hence the late July weakness is nothing
to fear.

A bit more disturbing however is the HUI's 200dma. 200dmas tend to run parallel
with the long-term trend in a market, and the HUI's has been nosing lower all
summer. While this could be construed as an early technical warning that the
HUI is on the verge lapsing into bear-market mode, I suspect it is just a peculiar
technical anomaly. I have been pondering this odd development all summer and
finally think I understand the reason why it happened.

The massive 2003 gold-stock upleg, which witnessed a stellar 125% gain in
the HUI in only 8 months or so last year, had a curious non-gold component
that contributed to it ... copper! The third
largest HUI component is a copper miner for some silly reason, and
copper prices soared in their biggest rally in at least a decade last year.
Naturally this copper stock rocketed higher skewing the HUI upward. If this
copper miner hadn't been included in the HUI, its 2003 rally would not have
been skewed as high and its 200dma wouldn't have been dragged high enough to
roll over this summer.

The current September issue of our acclaimed Zeal
Intelligence monthly newsletter discusses this copper skewing of the
HUI's 200dma in more depth, as well as digs deeper into the tactical gold
trends. In addition, all of our actual PM-stock and options trades carefully
researched and chosen to ride the probable accelerating gold upleg are detailed
inside. Please consider subscribing
today to learn how to apply all of this research to earning real-world
profits in your own portfolio!

The bottom line, as always, is gold. Gold's tactical uptrend looks gorgeous
regardless of the dollar's ambiguity or the technical blemishes on the HUI.
If gold is due to head higher, gold stocks will absolutely follow sooner
or later. The higher gold goes the higher
the earnings of the unhedged miners multiply. As their earnings rise their
valuations fall and pretty soon even conventional investors will break down
the doors to rush into the gold miners. Gold is the key!

And with the US dollar poised right on the verge of probably breaking lower
and plummeting through its downtrend channel after failing three consecutive
times to reach new higher highs, gold may indeed be preparing to soar to
fresh new bull-to-date highs itself. Contrarians need to be ready and positioned
to leverage this exciting potential event.

If you have questions I would be more than happy to address
them through my private consulting business. Please visit www.zealllc.com/financial.htm for
more information.

Thoughts, comments, flames, letter-bombs? Fire away at zelotes@zealllc.com.
Due to my staggering and perpetually increasing e-mail load, I regret that
I am not able to respond to comments personally. I WILL read all messages though,
and really appreciate your feedback!

Mr. Hamilton, a private investor and contrarian analyst,
publishes Zeal Intelligence, an in-depth monthly strategic and tactical analysis
of markets, geopolitics, economics, finance, and investing delivered from an
explicitly pro-free market and laissez faire perspective. Please visit www.ZealLLC.com for
more information, www.zealllc.com/samples.htm for a free sample, and www.zealllc.com/subscribe.htm to
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